The stock market crash on October 24, 1929 signaled the fragility of the US economy. Over the next couple of years, over 5,000 banks failed, leading to a great distrust in the American financial services industry. During this time, much debate over the performance of financial institutions and securities fields was happening in Washington. As a result, there was a congressional investigation into the questionable practices of the top investment banking firms and new federal Acts were enforced.
With the change of climate in investment banking, and the impact of the recession, Merrill Lynch decided to focus its attention to the commercial market of investment banking industry and cut down on expenditure by eliminating retail brokerage services. In 1930, Merrill Lynch sold its retail brokerage business to E. A. Pierce & Co, a midsize brokerage house with offices in 30 cities. Merrill and Lynch still kept some interest in the company but took no involvement in the management.
Charles Merrill chose to focus on one of the company’s acquisition, Safeway chain stores. He had gained controlling interest in Safeway grocery stores in mid 1920s and through his guidance the stores had grown rapidly nationwide. In late1930s, E. A. Pierce was going through huge losses and the company was close to dissolution. Merrill’s $1. 8m investment in the company was turning into a loss. The problem was primarily rooted in the low rate of trading volume. The problem was not just for Merrill Lynch, but also extended to all brokerage houses nationwide.
The effect of the 1929 market crash had materialized not so immediately but years later. After the sharp recession in 1937 and the smell of the war from Europe, Hitler invasion of Poland in 1939, there was little hope left for most of investors and the industry. In 1938, when everyone saw nothing in the market but “gloom and doom”, Winthrop Smith, one the junior partners at Merrill Lynch, saw opportunity in investment banking. He convinced Charles Merrill to go back to Wall Street.
By 1940, Merrill Lynch became incorporated with E. A. Pierce again and the firm was reorganized. Merrill insisted on keeping his partner’s name “Lynch” in the company title for sentimental reasons. Pierce stayed in the new reorganization but agreed to fade into the background. The policies Charles Merrill and his team developed rejuvenated the firm and the industry for the next quarter of the century. His goal was to create higher public trust to the firm and its employees so that it would bring more customers and trading volume.
Recognizing insurance companies’ success in absorbing the savings of the large sector of middle class citizens, Charles Merrill pursued to attract more American households to invest in common stock as a mean of income for old age. Through his contributions to the development of modern brokerage field, Charles brought “Wall Street to Main Street. ” Charles Merrill wanted to create a new culture in the industry. He believed that his rivals’ growth would guarantee his firm prosperity in the long run.
What he looked for was competitive advantage and not termination of his competitors. In this path, he designed a two-fold plan. The first was to draw tens of thousands of upper middle class households into Wall Street, and second, to encourage more corporations with an outstanding growth prospect into the marketplace. In the first few months of operation, Merrill Lynch accounts rose by one-third to approximately 50,000. The growth was steady for the next four years. In 1941-1944, 27,000 to 46,000 new accounts were added to the firm.
By the end of WWII, a total of 250,000 personal accounts were served by Merrill Lynch. All through these years, Merrill Lynch had quite a steady volume of trading in the NYSE, not fluctuating more than 8-12% of the total. The $300,000 loss in 1940 had turn to $459,000 pre-tax revenue in 1941. Two years later this amount listed $4. 1 million in pre-tax income. Partners earned a respectable 16% net profit on their investment. (Annual reports, 1940-1950, Merrill Lynch Corporate Archives)